Bitcoin 101

by Jacob Maichel

Bitcoin can be as confusing as it is fascinating. I thought it may be beneficial to those interested in Bitcoin to write an introduction to the technology to alleviate some confusion you might have.

Although Bitcoin is neither the first nor last crypto-currency it is without a doubt the most well known, while still being shrouded in secrets. Bitcoin was launched a few weeks after the Lehman Brothers collapse in 2008 by Satoshi Nakamoto, but no one is even sure who that is. Banking on Bitcoin, a documentary available on Netflix, expose the possible identities of Nakamoto.
Bitcoin came about during the Great Recession and responds to a call for decentralized banking. Online commerce relies so heavily on a trusted third party acting as a financial intermediary and that is absolved with the use of crypto.

Put simply, Bitcoin is an online accounting system that records the value of assets (coins) in an open ledger. The benefit of using a non-localized ledger is that it cannot be hacked. All transactions are kept on the “Blockchain”, which some think is the most transformative technology Bitcoin brought about. The Blockchain is the ledger itself and every transaction is saved to everyone’s computer on the network instantaneously. To help envision this imagine a spreadsheet that is duplicated on everyone’s computer on the network and is updated regularly. This technology has a number of advantages over traditional ledgers that are held only in one place, inside the company. Satoshi Nakamoto in Bitcoin: A Peer-to-Peer Electronic Cash System (often referred to as The White Paper)  describes his ingenious incentive strategy to reward Bitcoin “miners” for continually maintaining the servers and issuing new coins.

New coins are released into the blockchain every 10 minutes to be “mined” with a fixed amount of coins to ever be released. As time goes on coins will be released less frequently until the last coin released around 2140. The fixed amount of coins guarantee that there is no artificial inflation because no more currency can be put into the blockchain.

Bitcoin miners are paramount in the process as they set up computers to solve the complicated math problems required to unlock a coin. These miners are not college kids in dorms they are typically large scale operations, and many companies are setting up just to mine coins. After a certain number of coins are out the incentives for miners changes due to scarcity of new coins. They then transition to being rewarded by collecting processing fees on the Blockchain- which continually updates the ledger. The White Paper breaks this process down very clearly as the creator intended.

So what gives Bitcoin any value? A major reason it is so valuable is the peace of mind that comes along with the technology. The safety and anonymity it gives users is held in very high regard. With Bitcoin’s decentralized approach it ensures that your money is safe from the traditional downfalls of institutionalized banking.

I think cryptocurrency is a logical step in the future, and what it can be adapted to is limitless. Whether or not Bitcoin stays relevant is yet to be seen, but the power of the Blockchain technology is something that should not be overlooked!

 Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University